Calculating the cost of a new hire

So, your business is growing and demand is quickly catching up with your output. You've thought about whether it's the right time to hire, and you need some extra support, so you’re looking at hiring a new employee.

That’s great! But the first question you have to ask is, “how much does it cost to hire an employee?”

So let’s outline the various costs that go into hiring a new employee and explain some of the key ways you can mitigate your cost per hire.

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The direct costs of a new hire

Direct costs are costs that can be easily tied to a fixed item or service. They’re usually easy to identify, as they relate to tangible expenses like salary, commission, and bonuses. You set these costs yourself, so you’ll naturally have a higher degree of control over them.

Salary

Usually, the biggest chunk of change you’ll spend on a new hire will come in the form of their salary.

The average gross salary in the US currently sits at $53,490 per year and €24 947 in the EU, but the salary range that you’ll offer will depend entirely on job role, location, and experience. If you’re looking to hire a part-time employee, you can use a pro-rata salary calculator to work out what to pay them based on an hourly rate.

If you’re not sure what to offer your prospective employee, do some research on similar roles in your sector, work out the average, and tweak your range based on the level of experience and expertise you’re looking to hire. Sites like Glassdoor and PayScale are often a good starting point to understand what a reasonable salary for a role might be.

Commissions

Commissions are popular incentives for employees working in sales roles. Usually, it’s offered as a percentage of the total sales value when a deal is closed.

The commission offered can vary wildly from company to company based on industry, experience, and business goals. The typical commission for sales starts at around 5% but this can easily climb to 40% in more technical roles with a heavier emphasis on a commission-based pay structure.

Often, commission is offered alongside a base salary, but some companies will offer commission-only packages with a higher percentage of the sales value.

Bonuses

If your business offers any kind of bonus scheme, you’ll need to factor that into your new hire costs. Typically, staff bonuses are paid either at the end of the calendar year, at the end of the financial year, or on the anniversary of their start date.

There are a variety of different bonus schemes that businesses use to encourage employees. These range from individual and collective performance bonuses to non-monetary bonuses like extra holiday incentives.

Awarding bonuses sit entirely at each business’s discretion. Sometimes bonuses are written directly into an employment contract, other times they’re awarded on an ad-hoc basis with no defined criteria. Either way, if you plan on offering bonuses to your new hires, you’ll need to include it in your overall cost calculations.

Calculating direct costs

Once you’ve decided on the above, it’s time to add everything together to find out your total cost for your new hire across their first year of employment. This will give you a good idea of what to expect so you can plan your budget accordingly. As hiring is more of a negotiation than a set-in-stone process, we recommend setting a rough estimate—rather than an exact figure.

The indirect costs of a new hire

Aside from the more obvious, surface-level costs of hiring a new employee, there are a whole host of indirect costs you’ll have to consider too. Indirect costs are variable and mainly address operational needs like recruitment, hardware, and purchasing training materials.

Recruitment and job board fees

Ever wondered how much does it cost to recruit an employee? Before you hire an employee, you’ve got to find them. And that can often mean working with a recruiter or advertising your job listing on a job board like Indeed or LinkedIn Careers.

Working with a recruiter or headhunter means you’ll have to factor in recruiting fees—which will usually be a percentage of your employee’s salary. This can be expensive, but a recruiter will be perfectly positioned to help you source quality applicants faster.

If shelling out for a recruiter isn’t your style, then posting on a job board can also be effective. The right job listing will help you attract a high volume of potential employees for a cheaper cost. However, DIY posting can eat up a lot of your time as you read through resumes and assess each applicant. Whatever method you use, make sure to factor it into your cost calculations.

Work benefits

Alongside monetary incentives—you need to factor in work benefits and perks. Benefits packages have become extremely popular in recent years and can play into a prospective employee’s decision to join your business.

So, if you’re planning on offering company perks like health insurance, paid time off, car allowances, discounts, gym memberships, and more—then make sure you’ve got the budget to make it happen.

Hardware and software costs

Another cost you need to consider is all the different equipment your new hire needs to do their job effectively. This will differ between roles, so you need to have a firm grasp on what’s required before your new hire starts.

Typical items include:

• Computer: Laptop or desktop
• Peripherals like mouse, keyboard, monitor, or headset
• Software licenses
• Company phone

Training costs

Job training takes time and costs money. Certain roles will require training that takes days, weeks, and even months to complete before the employee is confident that they can perform their job without assistance.

Plus, if you have to pay for training towards specific certifications, you’ll need to include its costs in your overall hiring expenses too.

Calculating indirect costs of hiring an employee

Indirect costs will be a little harder to estimate than direct costs, as there’s a lot of variance between each new hire. Still, once you have a rough idea of what it will cost to recruit, train, and kit out your new employee, note it down and add it together.

The hidden costs of hiring a new employee

Lastly, there are costs that aren’t immediately visible. These hidden costs usually add up through time spent performing interviews, completing admin, and training your new hires until they’re comfortable working without assistance.

Time spent in interviews and reference checks

Finding the best fit for your business takes time. And that means reading resumes, performing interviews, undertaking reference checks, and sending documents out for signature.

Naturally, this means that until you find the right person for the job, a decent portion of your time will be taken up sorting through and meeting potential candidates. This is an unavoidable part of hiring, so be sure to factor in the cost of lost productivity.

Time spent onboarding and training

During the first few weeks with your new hire, you’ll likely lose productivity from them and your existing employees—especially if they’re directly involved with the training and onboarding process.

Although proper training takes time, effort, and resources, it’s undoubtedly beneficial to a growing business and will help your new hire find their feet—so make sure you factor in everything you need to get a new employee up to speed.

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Calculating the total cost of a new hire

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Adding everything together

Now it’s time to add together the direct, indirect, and hidden costs of a new hire. It can a lot of work, but if you’ve broken down each component separately, you should quickly come to a rough figure of the total cost.

Make hiring more cost-effective

Make no mistake, hiring can be one of the biggest investments you make, but there are some things you can do to make it less of a burden on your wallet.

Dropbox Sign can help you automate and simplify your hiring paperwork to help you save time and streamline your hiring process. With easy-to-follow workflows, you can expedite onboarding and get your new hire set up and sorted much faster.

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